7. External audit

Question 1

Roles and responsibilities of the cosec in the external audit process

Answer 1

Give the auditor access to all the requested information and documents, including s.172 evidence.

Offence (fine/imprisonment) if CoSec doesn’t comply, provided with false information or mislead.

Question 2

What companies are exempt from audit?

Answer 2

Small
Subsidiary
Dormant

They still may choose to have accounts audited

Question 3

Does audit contain any assessment of the future viability of the company or judgement on future efficiency?

Answer 3

No

Question 4

Rights of auditors

Answer 4

Auditor has the following rights under the Act s499, 502:

1. Right to access to the Co’s books, accounts and records.
2. To require explanations from d&o
3. Auditor can attend director meetings
4. To require from all UK subsidiaries all information
5. All notices and other communication re GM
6. To attend GM and speak on any business of the meeting

Question 5

What affects the independence of the auditor?

tba

Answer 5

S.1214
A person may not be appointed as a statutory auditor if he is:
-an officer or employee of the company
-a partner or employee of the auditor

Question 6

What is the auditor’s main objective?

Answer 6

To obtain reasonable reassurance that the financial statements, prepared by the Co management are free form material misstatement, whether due to fraud or error and to issue a report to the Co members that includes auditors opinion.

Question 7

What type of individual or firm cannot be appointed as an auditor?

Answer 7

A person cannot be appointed as an auditor if they are an officer/employee of the company or associated undertaking (i.e. subsidiary or parent) , any person or firm that has a business relationship with the company.

Question 8

What non-audit services auditors are prohibited to providing to PIE?

Answer 8

Tax

Management

Bookkeeping

Payroll

Risk Management

Valuation

Legal

Internal audit

Capital structuring

HR

Underwriting shares

Question 9

What is the ratio of permitted audit: non-audit service for PIEs?

Answer 9

70/30

Question 10

Can anyone be appointed as a company auditor?

Answer 10

It must be a registered auditor, not prohibited from being appointed.

Question 11

Can liability of the auditor be limited?

Answer 11

Yes, but it must be consented by members

Question 12

How many consecutive years can an auditor be appointed for PIE?

Answer 12

10 years plus 10 years if the tender has been carried out.

Question 13

Duties of an auditor

Answer 13

Carry out sufficient investigations to form an opinion as to whether:

• adequate accounting records have been maintained
• the accounts are consistent with the accounting records
• rem report is consistent with the accounting records.

Question 14

What should be stated in the auditors report?

Answer 14

Whether the accounts
1. have been properly prepared in accordance with the financial reporting framework
2. have been prepared in accordance with the requirements of the Act, and where relevant, the IAS regulations, and
3. have given a true and fair view :
in respect of balance sheet
in respect of the profit and loss account
in respect of group accounts of the state of affairs at
the end of financial yea

Question 15

What should be included in the report to the Audit Co?

Answer 15

• A description of scope and timing of audit
• A description of methodology used
• The quantative level of materiality applied, including
  factors
• Any significant deficiencies in fin statements
• Any significant matters identified (non-compliance etc)

Question 16

Describe the appointment process for PIE companies

Answer 16

PIE

A Statutory Audit Directive applies to PIES, statutory auditors and audit firms. The Directive introduced pan-European legislation restricting the length of auditor appointments to PIES for financial years beginning on or after 17 June 2016.

Tender process:

can be carried out either by the directors (if they do not have an Audit Committee)

If carried out by the directors – they decide on how to carry out the tender process

If carried out by the Audit Committee – make their recommendation to the full board of their top two firms for appointment, formally confirm their recommendation is free from 3rd party influence or contractual restriction

Must be extended to at least 2 firms either of which has a reasonable chance of winning

Decision is made by the Board.

If directors disagree with the recommendations made by the audit committee, the Board must provide reasons why.

Rotation

Audit engagement partner and key audit partners – rotated every 7 years for maximum of 20 years – 2yr extension from FRC (I,.e. max 22)

Firm – tendered every 10 years

Question 17

Non-PIE public

Answer 17

Non PIE

Public - s. 489 CA 2006 provides that Every public company appoints an auditor except dormant companies.

The directors appoint the auditor on the first accounting cycle

After this, the members appoint the auditor at the conclusion of the meeting at which the accounts for the previous financial year are laid before the members.

The appointment of an auditor to a public company does not automatically renew and their appointment ceases at the conclusion of the meeting at which the accounts are laid before the members UNLESS they are reappointed s. 491 (term of office of auditors of public company)

Question 18

Non-PIE - private

Answer 18

Private – auditors must be appointed in the following instances, unless the Directors have reasonable grounds to believe the company qualifies to be exempt from appointing one.
For the first audited financial year

Before the end of the period allowed for sending the accounts to the members, or

If earlier, the date the accounts were sent to the members

Subsequent years - auditors must be appointed or reappointed within the period of 28 days commencing on the deadline for sending the accounts to members. known as the ‘period for appointing auditors’ s.485 CA2006.
Generally, auditors are appointed initially by the directors and the appointment is confirmed either annually by the members in a general meeting or if there is no objection to the appointment continuing automatically (when there are no general meetings).

Where no auditor has been appointed by the end of the next period allowed for appointing auditors – the auditor in office immediately before that time is deemed to have been reappointed UNLESS:

Their appointment was made by the directors

The Articles require an actual appointment

The reappointment is prevented by members under s. 488

Resolution is lost

Directors have resolved that no auditor to be appointed for the financial year

Question 19

Removal -PIE

Answer 19

PIE

Resignation – must give notice to the company that must be accompanied with reasons for resignation otherwise the notice will not take effect.

If the resigning auditor makes a statement that is considered to be brought to the attention of the members and creditors – the company may lodge a requisition calling on directors to convene a general meeting to consider the explanation of the circumstances connected to the resignation.

PIEs only - Application to court to remove auditor from office s.511A CA 2006

Question 20

Removal - Non PIE

Answer 20

Methods of removal:

Ordinary resolution carried - Note that although it is an ordinary resolution – it requires special notice of 28 days

Notice given to Registrar – auditor is removed and replaced

Notice given to members

The auditor retires/ resigns – must give notice with reasons

Auditor is not reappointed at the next AGM (aka retiral)

Question 21

What does the audit partner rotation guard against

Answer 21

Threat to auditor independence and objectivity

Question 22

Do all companies need to change their auditors regularly?

Answer 22

No, only the PIEs

Question 23

When does the auditor of a PIE need to make a statement if they cease to hold office?

Answer 23

Always

Question 24

Who are the relevant authorities?

Answer 24

FRC and the auditors recognised supervisory bodies

Question 25

Who is the audit report prepared for?

Answer 25

Members

Question 26

Is the audit process expected to uncover errors or fraud

Answer 26

No - only material errors and emissions.